My Process
I was recently talking with a friend of the company, and we were discussing our approaches to investing. Eventually, we got down to deciding what a good company is. My process of choosing a good company has morphed over the past five years (I started in 2019,) and it will change again, however, this is how I pick right now.
If I have cash on hand, I scroll through the S&P 500. If I were to change any part of my investing strategy, it would be this part, as it obviously puts a ceiling on how I can invest. If I do not see anything on the S&P 500 that looks enticing, I will look at the news and see if I can identify any trends or sudden drops in the prices of companies I have my eye on. There is also no requirement that if you have some cash on hand you have to spend it now. Patience is one of the most valuable skills when investing successfully.
Now, I have identified a company that I like. Let’s use Disney as an example since I love them unironically. I have decided that Disney is a company I want to take a look at, so I head over to the website Alpha Spread. It does not matter what order you look at these in, but usually, I look at intrinsic value first. There are many different formulas for how to calculate intrinsic value, but generally, I think they are about accurate. It is fine if the company is overvalued according to IV, as long as historically they are also overvalued. Apple for example is always overvalued by IV and that means the market is extremely confident in them and willing to pay a premium. I mostly check IV to see if the company has recently had a spike into overvalued territory. Then I look at the P/E ratio. Price to earnings is less important than it used to be, especially in the world of lightning growth but it is still worth looking at, especially the P/E history, what does the company usually hover around? Then, I listen to the most recent earnings call, read a summary, or look at the transcript, any of the above. Then I look at the most recent earnings report itself to see if I can spot anything I missed. I look specifically for these figures, I look to see if revenue is growing steadily and has a decent CAGR. I look to see if free cash flow is growing at a similar rate, and then I look at expenditures. It is okay with me, even encouraged depending on what stage of the cycle the business is in, if the business has growing expenditures. Having to spend money to make money is generally true, so long as revenue is growing at a rate superior to expenditures. Wall Street price targets are generally useless, but for the sake of confirmation bias, looking at them is not awful. Then I switch from Alpha Spread.
I go over to Open Insider. Sales will almost always outpace buys from insiders, because of stock-based incentives, but I check to see if the ratio is abhorrent or if insiders are buying a lot. Optionally, you can look to see if government officials are buying. Even though I despise their ability to do so, government sentiment is a good barometer generally.
Then I go to TIKR Terminal. It has a bunch of information to double-check, but all of the company’s earnings and information is right there in an easy-to-navigate site.
Then I go to TipRanks. This website has a ton of information and is probably my second favorite website to use for research. Using TipRanks, you can learn how the rest of the world feels about your stock. I take an especially hard look at how hedge funds feel. However, you have to also remember that many hedge funds suck at investing; just because they have some big name attached to them does not make them good at investing money. Joshua Kushner, for example, has returned a 72% loss over the past 52 weeks. Ten percent of hedge funds fail each year, so they are not the best barometer for the quality of an investment, however, there are worse.
